Canada's July real GDP: Economic weakness and trade uncertainty intertwined
2025-08-01 01:18:25
According to Statistics Canada's latest report, Canada's real GDP is projected to decline by 0.1% month-over-month in May 2025, in line with market expectations and matching the decline in April. Preliminary data for June indicate a slight recovery, with growth estimated at 0.1%. However, with trade uncertainty peaking, and exports in particular retreating from the highs seen in the first quarter due to preemptive tariff action, overall economic growth is expected to be close to zero in the second quarter. Notably, Statistics Canada's preliminary estimate of zero GDP growth for the second quarter is significantly better than the Bank of Canada's forecast of -1.5% annualized growth and the Bank of Montreal's forecast of -0.8%.
Behind the Differences in GDP Forecasts
The significant discrepancy between Statistics Canada's estimate of zero GDP growth for the second quarter and the Bank of Canada's -1.5% forecast requires special explanation. Monthly GDP data are based on estimates of industry output, while the full national accounts data, released at the end of next month, will measure GDP from an expenditure perspective (for example, the 3.0% annualized growth rate in the second quarter of the United States is based on this methodology). Output and expenditure estimates tend to diverge when there are large fluctuations in imports and exports, as has been the case over the past two quarters. A sharp decline in exports could significantly depress quarterly expenditure estimates, which may not be fully reflected in the monthly output data. Therefore, the Bank of Canada's forecast is likely to be closer to the final quarterly data.
"Almost everyone welcomed Statistics Canada's estimate of flat output in the second quarter, which is a big win," said Doug Porter, chief economist at BMO Capital Markets. He also noted that the Bank of Canada might be slightly surprised by the initial stabilization result.
Drivers of the May GDP decline
The 0.1% decline in GDP in May was primarily driven by two idiosyncratic factors. First, oil sands production fell 3.0% month-over-month, partly due to maintenance operations and partly due to wildfire-related production cuts. Second, a 0.8% month-over-month decline in the public administration sector fully offset an increase of the same magnitude in April due to the federal election, and this alone reduced monthly GDP by 0.05 percentage points. Furthermore, economic weakness was widespread, with 12 of 20 sectors experiencing declines. Despite this, GDP still grew 1.2% year-over-year, roughly in line with the full-year forecast of 1.3%.
Capital Economics said May's decline was partly due to temporary factors such as refinery replacements in the energy sector and a pullback in public administration spending as a "reward" for growth boosted by April's elections.
Preliminary June data and third-quarter outlook
The preliminary estimate for June GDP growth was 0.1% month-over-month, slightly below expectations, but indicating a robust economy with upside risks. Actual June data and full second-quarter figures will be released on August 29th, providing a more accurate picture of the economy. Capital Economics stated that while GDP may have contracted in the second quarter, the same trend is unlikely to continue in the third quarter, and the June rebound offers hope for improvement in the third quarter.
Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, pointed out that spending data in the first quarter was much stronger than industry data, leading to an unexpected 2.2% increase in GDP, while there may be a reversal in the second quarter and the weakness in spending data may be more obvious.
Job Market and Wage Dynamics
The May Payroll Survey (SEPH) showed an increase of 15,300 jobs, partially offsetting the month's weak GDP. However, year-over-year employment growth in the SEPH was only 0.2%, significantly lower than the 1.7% increase in the Labor Force Survey (LFS). The job vacancy rate fell for the sixth consecutive month to 2.7%, the lowest level since 2017 and down 3 percentage points from its peak of 5.7% in 2022. Fixed-weighted wage growth slowed to 3.6% year-over-year, reflecting widespread labor market weakness.
Trade uncertainty and tariff threats
Canada's economy appears to have weathered the peak of trade uncertainty, suffering less damage than expected. The USD/CAD exchange rate fell for the sixth consecutive day, reaching 1.3834, its highest level since late May, reflecting continued dollar strength and market caution ahead of the August 1 tariff deadline. US President Trump reiterated his threat to impose 35% tariffs on Canadian goods not included in the USMCA, particularly following Canada's support for Palestinian statehood, which he said "makes negotiations very difficult." The tariffs could cover key goods such as copper and pharmaceuticals, while trade talks are progressing slowly, with Canadian Prime Minister Mark Carney acknowledging that a comprehensive agreement by the deadline is unlikely.
Bank of Canada policy and market reaction
On July 30, the Bank of Canada maintained its policy rate at 2.75%, noting that inflation was close to its 2% target, but cautioned against potential inflationary pressures and uncertainty surrounding US trade policy. Governor Tiff Macklem indicated that further rate cuts were possible if economic weakness persisted and trade-related price increases were manageable. TD Securities believes that consecutive declines in GDP in April and May could prompt another rate cut.
Summarize
The Canadian economy showed some resilience in the second quarter, with preliminary data better than expected. However, weak sectoral performance, a cooling job market, and trade uncertainty remain challenges. The divergence between the forecasts from Statistics Canada and the Bank of Canada highlights the diverging perspectives on spending and output, and complete data will provide a clearer picture.
Data in the coming weeks will be crucial for determining whether the third quarter can continue the June recovery. Trade negotiations and tariff threats continue to cloud the economic outlook, forcing the Bank of Canada to strike a careful balance between inflation and growth.
Behind the Differences in GDP Forecasts
The significant discrepancy between Statistics Canada's estimate of zero GDP growth for the second quarter and the Bank of Canada's -1.5% forecast requires special explanation. Monthly GDP data are based on estimates of industry output, while the full national accounts data, released at the end of next month, will measure GDP from an expenditure perspective (for example, the 3.0% annualized growth rate in the second quarter of the United States is based on this methodology). Output and expenditure estimates tend to diverge when there are large fluctuations in imports and exports, as has been the case over the past two quarters. A sharp decline in exports could significantly depress quarterly expenditure estimates, which may not be fully reflected in the monthly output data. Therefore, the Bank of Canada's forecast is likely to be closer to the final quarterly data.
"Almost everyone welcomed Statistics Canada's estimate of flat output in the second quarter, which is a big win," said Doug Porter, chief economist at BMO Capital Markets. He also noted that the Bank of Canada might be slightly surprised by the initial stabilization result.
Drivers of the May GDP decline
The 0.1% decline in GDP in May was primarily driven by two idiosyncratic factors. First, oil sands production fell 3.0% month-over-month, partly due to maintenance operations and partly due to wildfire-related production cuts. Second, a 0.8% month-over-month decline in the public administration sector fully offset an increase of the same magnitude in April due to the federal election, and this alone reduced monthly GDP by 0.05 percentage points. Furthermore, economic weakness was widespread, with 12 of 20 sectors experiencing declines. Despite this, GDP still grew 1.2% year-over-year, roughly in line with the full-year forecast of 1.3%.
Capital Economics said May's decline was partly due to temporary factors such as refinery replacements in the energy sector and a pullback in public administration spending as a "reward" for growth boosted by April's elections.
Preliminary June data and third-quarter outlook
The preliminary estimate for June GDP growth was 0.1% month-over-month, slightly below expectations, but indicating a robust economy with upside risks. Actual June data and full second-quarter figures will be released on August 29th, providing a more accurate picture of the economy. Capital Economics stated that while GDP may have contracted in the second quarter, the same trend is unlikely to continue in the third quarter, and the June rebound offers hope for improvement in the third quarter.
Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, pointed out that spending data in the first quarter was much stronger than industry data, leading to an unexpected 2.2% increase in GDP, while there may be a reversal in the second quarter and the weakness in spending data may be more obvious.
Job Market and Wage Dynamics
The May Payroll Survey (SEPH) showed an increase of 15,300 jobs, partially offsetting the month's weak GDP. However, year-over-year employment growth in the SEPH was only 0.2%, significantly lower than the 1.7% increase in the Labor Force Survey (LFS). The job vacancy rate fell for the sixth consecutive month to 2.7%, the lowest level since 2017 and down 3 percentage points from its peak of 5.7% in 2022. Fixed-weighted wage growth slowed to 3.6% year-over-year, reflecting widespread labor market weakness.
Trade uncertainty and tariff threats
Canada's economy appears to have weathered the peak of trade uncertainty, suffering less damage than expected. The USD/CAD exchange rate fell for the sixth consecutive day, reaching 1.3834, its highest level since late May, reflecting continued dollar strength and market caution ahead of the August 1 tariff deadline. US President Trump reiterated his threat to impose 35% tariffs on Canadian goods not included in the USMCA, particularly following Canada's support for Palestinian statehood, which he said "makes negotiations very difficult." The tariffs could cover key goods such as copper and pharmaceuticals, while trade talks are progressing slowly, with Canadian Prime Minister Mark Carney acknowledging that a comprehensive agreement by the deadline is unlikely.
Bank of Canada policy and market reaction
On July 30, the Bank of Canada maintained its policy rate at 2.75%, noting that inflation was close to its 2% target, but cautioned against potential inflationary pressures and uncertainty surrounding US trade policy. Governor Tiff Macklem indicated that further rate cuts were possible if economic weakness persisted and trade-related price increases were manageable. TD Securities believes that consecutive declines in GDP in April and May could prompt another rate cut.
Summarize
The Canadian economy showed some resilience in the second quarter, with preliminary data better than expected. However, weak sectoral performance, a cooling job market, and trade uncertainty remain challenges. The divergence between the forecasts from Statistics Canada and the Bank of Canada highlights the diverging perspectives on spending and output, and complete data will provide a clearer picture.
Data in the coming weeks will be crucial for determining whether the third quarter can continue the June recovery. Trade negotiations and tariff threats continue to cloud the economic outlook, forcing the Bank of Canada to strike a careful balance between inflation and growth.
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